The US dollar has maintained its status as the dominant reserve currency for over 70 years, a position solidified by the Bretton Woods Agreement in 1944. This dominance has been reinforced by the dollar's stability during major global upheavals, allowing the US to benefit from lower borrowing costs and a trade deficit due to its currency's global acceptance [42785c7e]. Recent data from the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) indicates a gradual decline in the dollar's share of allocated foreign reserves, which now stands at 58%. This decline has coincided with a rise in the shares of nontraditional reserve currencies, including the euro and the Chinese renminbi [4208eae4] [27f4fe5b].
The euro currently accounts for 21% of global foreign exchange reserves, while the renminbi's share of global payments increased from 4% in 2022 to 8% in 2024, although its global reserve share remains at only 3% [12da4bec]. In a recent call to action, experts from Renmin University’s National Academy of Development and Strategy urged the Chinese government to enhance its provision of yuan-denominated loans to developing countries, aiming to support global de-dollarisation and position China as a primary liquidity source in the international market [f7ad9ac2].
The ongoing decline of the US dollar's share in global reserves is part of a larger trend in the international monetary and reserve system, which is gradually evolving with a shift away from dollar dominance and a rising role for nontraditional currencies enabled by new digital trading technologies [4208eae4] [27f4fe5b]. The recent geopolitical shifts, particularly following Russia's invasion of Ukraine in February 2022, have further complicated the landscape. Western sanctions on Russia have prompted countries to reconsider their reliance on the dollar, leading to a multipolar world order where BRICS+ nations are increasingly challenging dollar dominance by seeking to trade in their national currencies [42e250b3].
Despite these shifts, the US dollar continues to be the dominant global currency, valued at over $25 trillion. The dollar's supremacy is bolstered by the United States' geopolitical influence, historical legacy, and a robust military budget of $877 billion [12da4bec]. However, the rise of the 'petroyuan' allows oil trade without reliance on the dollar, posing a potential challenge to dollar supremacy. Major state-owned enterprises, such as China National Offshore Oil Corporation, are actively promoting the use of the yuan in international trade, further supporting its internationalisation efforts [f7ad9ac2].
The euro and renminbi face significant hurdles in becoming global reserve currencies, including political fragmentation in the Eurozone and China's economic issues like massive debt and capital controls [42785c7e]. According to a recent analysis by the World Economic Forum, while the US dollar remains the world's reserve currency, some central bankers and global leaders have called for the advent of a BRIC currency to challenge USD dominance. However, the historical forces that have shaped USD dominance include Bretton Woods, the Marshall Plan, and the Washington Consensus, which are likely to ensure the dollar's position as a reserve currency for the foreseeable future [fe6b4d8e].
In conclusion, while the euro and renminbi are gaining traction, the US dollar remains the dominant currency in global finance. The ultimate challenge to the USD as a reserve currency may come from within, as inflation, US debt, and sanctions could diminish the dollar's appeal, leading to significant economic challenges for the US if it loses its reserve currency status [42785c7e] [12da4bec]. The interplay of monetary globalization and geopolitics is reshaping the world monetary order, suggesting that de-dollarization could increase inflation in the US while enhancing financial autonomy for developing countries [42e250b3].